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Big Seattle charity makes another iffy financial efficiency claim

“More than 98 cents of every donated dollar goes to meet community needs,” the largest unit of the nation’s largest charity by contributions declares on its Web site. Also up there: a link to its freshly posted financial statement for the fiscal year ended June 30.

Well, not by my reckoning, which works out to 91%. Nor by the reckoning of the parent United Way organization, which also figures about 91%. Nor even, amazingly, by UWKC’s own, brand new financial statement. It includes a convoluted schedule unapproved by its auditors that in effect calculated the charitable commitment at 97.9%–less than 98%, not more.

You have to understand this is not so much about numbers as it is about P.R. One way competing charities battle for your hard-earned dollars is by depicting themselves as more financially efficient–more money going to the mission, less to fundraising and certain overhead–than the next guy. There are standard metrics for these calculations.

Some dubious charities I have written about before or after becoming New To Seattle use highly questionable accounting ploys to hide financial efficiencies as low as 0.4%–yes, only 40 cents of every $100 going to the cause. I hasten to add that UWKC to my knowledge is not a dubious charity. But as I explained earlier this year, it uses its own, ah, unique formula to burnish its presentation that, sadly, borrows a tactic from some of its more unworthy rivals. I will say that UWKC does state its methodology in full–if you are able to slog through to page 23 of the 28-page financial statement, and then understand what you’re reading.

I’ll save you the trouble.

In round numbers, according to its financial statement, UWKC received cash donations, largely from workers via payroll deduction, of $95 million (a 10% drop from 2011, by the way). There there was another $8 million in grants, corporate sponsorships and donated labor, and $5 million from a separate endowment now totaling $136 million set up years ago by the Bill and Melinda Gates Foundation. Total revenue, including other sources and an allowance for uncollectibles: $109 million.

On the expense side, $100 million was spent in gifts to other charities or on UWKC’s own charity programs. Another $10 million went for UWKC fundraising expenses and certain overhead. Total expenses: $110 million. UWKC ran a deficit of $1 million.

Now, charitable commitment is usually defined as the amount of money spent in furtherance of the mission–here, $100 million–as a percent of total expenses, here $110 million. So by simple math, $100 million/$110 million equals 91%. My number.

But there are other ways to calculate this. A page in the back of the UWKC financial statement–page 26 to be exact–explains that the “United Way Worldwide Method” formula is to use total revenue, rather than total expenses, as the denominator. The calculation also uses numbers from federal tax returns, which are slightly different and, in the case of UWKC, a year out of date. Still, it looks like that methodology also would produce a 91% efficiency ratio.

There’s really nothing wrong with 91%–except, it seems, to the UWKC management.

So how did the agency come up with its more-or-less 98% calculation? Mainly by leaving out most of the bad stuff–or at least erasing it. Among other ploys, UWKC took some of that revenue and applied it to wipe out most of that $10 million in inconvenient fundraising and certain overhead. This is called netting, and in the charity world is the tool of some highly questionable operators. The UWKC financial statement allowed as how its charitable commitment calculation was “specifically designed … for this purpose.”

I’ll say.

UWKC started with the $10 million in fundraising and certain overhead. Then it subtracted $1 million in depreciation, apparently hoping you’ll believe that the equipment used in such activities will never wear out.

Next, UWKC subtracted upwards of $1 million in donated labor and expenses attributed to overhead, saying it was covered by that $8 million bucket of grants, corporate sponsorships and donated labor and not part of what the working public donated. With rounding, remaining fundraising and certain overhead dropped to $7 million. I should note here that UWKC included that $8 million in a July 24 press release bragging about total contributions of $103 million. UWKC needed that $8 million to stay above the psychologically significant $100 million mark. But then, to make itself look super-efficient, it had to ignore all that corporate stuff because those numbers–$1 million in overhead against the $8 million in gifts–implied a charitable commitment on this tranche of only 87.5%, a whole lot less than 98%.

Finally, UWKC deducted the $5 million coming from the Gates Foundation-seeded endowment. Remember how in school you were taught that a negative negative becomes a positive? That’s what UWKC did. In effect it classified the Gates money–which in my view was simply additional private contribution–as a negative and applied it against another negative–that remaining fundraising and overhead expense. That $10 million in bad stuff fell to $2 million–for the purpose of public consumption, anyway.

Dividing the $2 million in remaining bad stuff by the $95 million in public contributions, UWKC on its statement calculated its “net operating ratio” as 2.1%. Subtracted from 100%, that worked out to 97.9% going to community needs, not the loudly proclaimed “more than 98%.” My guess is that Web-posted language will be fixed if someone at UWKC reads this.

When it came to blessing that +/- 98% ratio claim, UWKC’s auditor, the local accountancy of Moss-Adams LLP, hightailed it across the Cascades. “Such information,” the firm wrote in the very same financial statement, “has not been subjected to the auditing procedures applied in the audit of the financial statements, and accordingly we do not express an opinion or provide any assurance on it.”

Comments

Bottom line – before giving, do your homework and give directly to the charity instead of through United Way. The 98 cent claim is misleading at best and one wonders why UWKC would resort to such accounting trickery normal used by sham charities. Even though UWKC claims 98 cents of each dollar goes to charity, they don’t say in that ad is that 9.5% is deducted if the donor designates a charity – that’s a lot more than the 2% they claim. One wonders why UWKC would feel compelled to employ such blatant accounting trickery normally reserved for sham charities. 91% is a perfectly good number and better yet,it’s accurate and credible. I’m going to write to UWKC’s executive staff and board and urge them to be honest with the generous donors who have trusted them with their goodwill. UWKC is a good charity that can stand on its own merits and instead of playing accounting tricks like this.